From the course: Finance Foundations

Introducing financial institutions

From the course: Finance Foundations

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Introducing financial institutions

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All right, let's talk about grandchildren. Oh, boy. So is this where you tell them that you have about a thousand grandchildren and I've only got 12? Oh, no, no, no, no, we'll leave that discussion to another time. Instead, let's talk about the investment program you've established for your 12 grandchildren. So tell us, what do you do? Okay. Well, when each grandchild is born, I set up a savings account for her or him. I start with $3,000, and then I add $100 a month. 100 each month. How long do you continue this? Well, I don't know. My oldest grandchild, Lily, is just 10 years old. My plan is to keep going until each grandchild turns 25 or until I die, I guess. Well, this is a great idea, but it sounds kind of complicated. For example, when you store the money, is it invested, and how do you remember to add $100 for each of your 12 grandchildren every month? No. It's easy. I've arranged all of this with a mutual fund company. When a new grandchild is born, this mutual fund company allows me to transfer the $3,000 directly from my local bank, and for $100 each month, I have the mutual fund company automatically make withdrawals from my local bank. It all works smoothly, with minimal effort on my part. Well, how is the money invested? The mutual fund company gives me hundreds of options. My wife, Ramona, and I have chosen to invest our grandchildren's money in an emerging markets stock index fund. The investments are spread among companies and countries such as Taiwan, Brazil, China, India, and Russia. So how much do you have to pay for this service? Not much. This year it's going to cost me a total of $250 in management fees for this mutual fund company to handle this for all 12 of my grandchildren. That is a good illustration of the benefits provided by financial institutions. Financial institutions are companies that are experts in managing money, risk, and complicated transactions on behalf of individuals like you and me and other companies. In essence, I have outsourced this complicated task, managing the savings funds for my 12 grandchildren to an expert, the mutual fund company. Now, there are several different types of financial institutions, ranging from your ordinary local bank to multinational insurance companies. Let's study financial institutions.

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